ESMA publishes review of accounting treatment of Greek sovereign debt

The European Securities and Markets Authority has published a review of Greek government bonds accounting practices in the IFRS financial statements for the year ended 31 December 2011.

It sets out the results of the review conducted by ESMA on accounting practices and disclosures regarding exposure to Greek government bonds.

The ESMA review considered a sample of 42 European financial institutions, each with significant exposure to Greek government bonds totalling an estimated gross exposure of around EUR80bn.

The review found a good level of consistency regarding the level of impairment losses, showing an improvement compared to June 2011 when there were significant variations between various financial institutions.

However, the review also found that issuers fell short of meeting IFRS disclosure requirements in particular in relation to transparency of gross exposure, maturities, valuation methodologies and fair value levels used, as well as the impact of impairment on profit or loss.

The review identified a lack of transparency on credit default swaps and their impact on exposure, e.g. whether issuers were buyers or sellers of these instruments. The review also highlighted a lower level of transparency regarding Greek government bonds that had been reclassified as well as exposures to Greek non-sovereign debt.

Steven Maijoor (pictured), ESMA chair, says: “The review conducted by ESMA has found a good level of consistency regarding the level of impairment of Greek sovereign debt, however a significant number of issues remain to be addressed by issuers in relation to their transparency to investors.

“While the report only focused on the accounting treatment of Greek sovereign debt and related instruments, I would emphasise that the principles we have highlighted in relation to disclosure and transparency are applicable more generally, and should be applied to any material exposures to financial instruments that become subject to enhanced risk.

“ESMA considers that each issuer should assess at every reporting period whether it holds any such instruments and provide disaggregated and expanded disclosures about these instruments to explain the nature and extent of risk. This will contribute to the protection of investors and stable and well-functioning markets.”